Activist investing and special situations.

Heartland American Companies: Norfolk (NSC), CSX (CSX) And More

Added on by Lee Ho Fook.

As the U.S. economy shows signs of strengthening, the rail companies should manage to also strengthen. The OECD expects GDP growth to be up 2% in 2013 before rising to 2.8% in 2014. Rail companies are fundamental for moving a variety of products across America on a daily basis. The top rail companies moving products across the U.S. include: Norfolk Southern (NYSE: NSC)Genesse & Wyoming (NYSE: GWR)CSX Corp (NYSE:CSX)Kansas City Southern (NYSE: KSU) and Union Pacific (NYSE: UNP)

These various rail companies are also seeing a boost from rising demand in oil, where the rail companies are becoming a preference to pipelines. As far as the rail companies go, I'm putting my money on CSX (NYSE:CSX). The stock pays investors a 2.7% dividend yield and is arguably the most undervalued company in the industry.  

The Association of American Railroads showed full year 2011 numbers up nicely, with rail volumes up 15% in and traffic in ton miles up 3.2% for the U.S. There is much speculation about the decline in coal demand, which is a big product transported by the U.S. rail companies. The coal demand decline is due to power plants converting to natural gas and reduced steel production. Picking up the coal slack has been notable strength in the auto and oil products, not to mention lumber and wood products -- thanks to a rebound in the construction industry. 

Over 50% of CSX (NYSE:CSX) revenues come by way of its merchandise business, which includes aggregates, fertilizer, food, paper and chemical products. CSX (NYSE:CSX) also delivers around 30% of North America's light vehicles. Norfolk Southern is CSX (NYSE:CSX)'s top competitor, but recent earnings announcements shows CSX (NYSE:CSX) reporting fourth quarter 2012 earnings in line on a year over year basis; meanwhile, Norfolk posted a year over year decline in earnings. Union Pacific faces a bit more competition than say CSX (NYSE:CSX). The rail operator has competition from not just its top rail competitor Burlington Northern, but also motor carriers running similar routes. The other key disadvantage to Union Pacific is that the motor carriers operate via public right of ways maintained by  government agencies. 

Kansas City is one of the smaller rail operators, but has a valuation that makes the company a rich-buy, meaning it is a bit expensive. Part of the overvaluing in Kansas City shares is due to the near-sourcing of manufacturing to Mexico, which is expected to help the company see above average growth. Genesee & Wyoming owns and operates short line and regional freight railroads, but is the smallest of the rail companies listed by market value.

Not only do the valuation and return on equity numbers shape up best for CSX (NYSE:CSX), but so does its growth when compared to Norfolk. The estimated five-year earnings growth for Norfolk comes in at 7%, versus CSX (NYSE:CSX)'s 12.8%. It appears that CSX (NYSE:CSX) may well be one of the best ways to play the rebounding U.S. economy, assuming you believe in an impending rebound. 

CSX (NYSE:CSX) will benefit from economic recovery in the U.S., given its role in transporting many of the basic materials required in manufacturing and construction. The rail company expects to see volume growth of 2% in 2013, thanks to boosts in intermodal container and auto shipments.